PulteGroup, Inc. (PHM) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2012 PulteGroup Inc.'s Earnings Conference Call. My name is Carolyn, and I'm your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now I'd like to turn the call over to Jim Zeumer. Please go ahead, sir.

Carolyn, thank you. Good morning, everyone. I want to thank you for participating in today's call to discuss PulteGroup's 2012 third quarter financial results. On the call today are Richard Dugas, Chairman, President and CEO; Bob O'Shaughnessy, Executive Vice President and CFO; and Mike Schweninger, Vice President and Controller. Before we begin, copies of this morning's press release and the presentation slide that accompanies today's call have been posted on our corporate website at pultegroupinc.com. Further, an audio replay of today's call will be available on the site later today. Please note that any non-GAAP financial measures discussed on this call, including references to gross margins reflecting certain adjustments, are reconciled to the U.S. GAAP equivalent as part of the press release and as an appendix to the call's presentation slide deck. Finally, today's presentation may include forward-looking statements about PulteGroup's future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now let me turn the call over to Richard Dugas. Richard?

Thanks, Jim, and good morning, everyone. We're very pleased to report today on PulteGroup's third quarter results, which show a continuation of the positive trends we have been experiencing throughout 2012. As reported in this morning's earnings release, key business metrics including orders, revenue, margins and of course, earnings, all showed meaningful year-over-year gains, and in certain instances, represent performance numbers not seen since 2006. More specifically, PulteGroup's third quarter earnings of $0.30 per share are up from a reported loss of $0.34 per share last year and are the highest quarterly earnings we have posted since the third quarter of 2006. The improvement in our overall operating performance was driven by a number of factors, but the ongoing expansion of PulteGroup's gross margin was clearly an important driver of the results. At 21.6%, our adjusted third quarter gross margin showed an increase of 320 basis points over the prior year and a sequential gain of 130 basis points from the second quarter of 2012. In addition to the 320 basis point increase in adjusted gross margin, we also realized an 80 basis point improvement in our overhead leverage as SG&A fell to 10.2% of home sale revenues. Taken in combination, it is clear that in just the past 12 to 18 months, PulteGroup's absolute and relative operating margins have improved dramatically. We recognize the hard work of our employees that went into delivering these gains and are very proud of their efforts. Another important quarterly metric is the 27% increase in year-over-year net new orders and corresponding 43% increase in order dollars, which has driven our backlog to a much stronger position. Our third quarter results and related 25% growth in PulteGroup's 9-month orders offer very encouraging signs about the healthier state of housing demand. As has been the case throughout the year, third quarter order growth of 27% was realized from 7% fewer communities. Over the short run, growing absorption pace in existing communities rather than expanding our footprint is allowing us to appropriately work through our land pipeline in support of delivering better long-term returns on invested capital. I want to stress this point on returns as it is clearly influencing the business decisions we are making today and will make tomorrow. I know some of you have heard this before, but I think it warrants repeating that we are focused on delivering better returns as we believe this is critical to creating greater shareholder value for our investors. The keys to our success in this effort are well known: better margins, better overhead leverage, improved inventory turns and more effective allocation of capital. Margins, both gross and operating, are clearly improving and benefiting from better pricing, a better mix of community and house closings, overhead leverage and better control of our house cost, as approximately 15% of our third quarter closings, up from 10% of second quarter closings, have been value engineered or undergone related should-cost analysis. Actions we have implemented to help support these results can be as obvious as the projects we invest in and the houses we build, to more subtle tactics around strategic pricing and reducing the amount of spec inventory we build. I would note that our third quarter finished spec number is 566 homes and is down 57% from last year and 5% from the prior quarter. Margin gains have been dramatic, but we know that moving the needle on inventory turns will take time, given our land bank. We are, however, implementing the needed actions, which include monetizing the existing assets while remaining disciplined in terms of adding new land positions. Although our net lot position and associated turns are improving slowly, the more immediate impact has been on our cash flow, which was positive in each of the first 3 quarters of 2012, a result that is certainly uncharacteristic for our company and, generally, the industry. Overall, we are extremely pleased with the third quarter results, both in terms of absolute performance and how they position us for success over the remainder of 2012 and beyond. Looking to broader industry trends, I will tell you that we entered this year with a conservative planning assumption that new home demand in 2012 would be comparable with 2011 at approximately 300,000 new home sales. Obviously, demand has been, and through the third quarter, continued to be, much more robust with industry-wide sales tracking roughly 25% above prior year levels. The list of factors supporting this recovery is well known and spans from higher rents, lower home prices and low interest rates to the rapid reduction of existing home inventory and a limited supply of new homes on the market. The corresponding change in other market dynamics, compared with the prior year, has been equally dramatic. As little as 12 to 18 months ago, industry conversations often included discussions about incentives, price discounts and acquisition of distressed land parcels. Today, we have upwards of 70% of our markets reporting that they have raised selling prices during the quarter, and that price increases were implemented in a widening number of communities relative to the beginning of the year. Clearly, demand conditions have changed for the better. We don't operate in a vacuum, however, so as you would expect, the stronger demand is beginning to stretch available labor resources. In the second quarter, we talked about how labor constraints in certain markets were resulting in longer build times, higher costs or both. In select communities, we have actually been constraining sales, both to maximize price but also to avoid having our start dates get out too far. With new home demand having accelerated quickly and having remained strong throughout the year, the number of markets feeling some degree of labor pressure is growing. In fact, almost all of our markets have now reached a point where labor pressures are being experienced to some degree. Certainly, this is not anything different than past cycles, so we feel comfortable with our ability to operate successfully in such an environment. Not taking anything for granted, however, our operations continue to move forward on our value creation initiatives related to lowering overall house costs, shifting to more of a base house model with consumers selecting their choice of options, increasing plan throughput and sharing common plans. In fact, during the quarter, we committed to implementing what we call common plan management zones. We have been piloting the process in which we share and build common floor plans over multiple markets in Texas and the Southeast for the past 12 to 18 months. Based on the success of our initial pilots, we have decided to implement a series of these zones throughout the country in 2013. All these actions are geared toward making PulteGroup a more efficient producer of homes and towards supporting our efforts of driving higher long-term returns. Now let me turn over the call to Bob O'Shaughnessy for additional comments on our third quarter financial results. Bob?

Thank you, Richard. PulteGroup's third quarter results demonstrate that we're making excellent progress in our efforts to improve the company's operating and financial performance. As Richard highlighted, our Q3 numbers indicate that our internal initiatives are allowing us to capitalize more effectively on the improved demand environment. Specifically, our net orders in the period totaled 4,544 homes, representing an increase of over 27% versus last year. Consistent with the second quarter and our guidance for the year, this increase was generated from 7% fewer communities as we realized better absorption paces within our existing projects. Looking a little deeper into our orders, each brand generated increases compared to the third quarter last year. On a year-over-year basis, our recorded orders increased 53% in our Pulte communities; 3% in our Centex communities, despite a 24% community count decline; and 23% in our Del Webb communities. It's worth noting that sales within our Webb communities appear to be picking up, as the 23% year-over-year increase compares with increases of 6% in Q1 and 17% in Q2. Hopefully, this momentum can carry throughout in the coming quarters. The mix of our orders was consistent with the second quarter of this year and break down 46% in Pulte, 28% Centex and 26% Del Webb. Looking at our third quarter financial results, home sale revenues were $1.2 billion, an increase of 12% compared with last year. The increase in revenue was driven by a 6% increase in average selling price to $279,000, combined with a 5% increase in closings to 4,418 homes. The increase in our average selling price reflect the continued shift in our product mix from the first-time buyer towards the move-up buyer, as well as price increases realized within our markets. Our mix of closings in the third quarter was consistent with the second quarter of this year and break down 42% from Pulte, 33% from Centex and 25% from Del Webb. In the third quarter of 2011, the closing mix was 36% Pulte, 37% Centex and 27% Del Webb. I want to take a moment to address questions we've gotten recently related to our conversion rate, which represents the total number of our quarterly closing divided by our backlog at the end of the preceding quarter. You will note that our conversion rate this quarter was 58%, which compares to 73% in the third quarter of last year. This lower percentage is due, in large part, to our decision 18 months ago to emphasize presale and minimize spec construction, which will naturally cause this ratio to be lower than a spec-heavy model. We are confident this strategic shift benefits us in terms of the metrics we use to evaluate our business performance, including revenues, margins, inventory turns and cash flows. Going forward, we would expect our conversion rates to be lower than it was in previous years as we focus on higher-margin presale homes and a larger backlog, allowing more efficient and consistent delivery flow. Looking at land sale revenues, we continue to execute on our strategy to evaluate, and where appropriate, to sell non-core land assets. During the third quarter, we generated land sale proceeds of $23 million, resulting in a net gain of $2 million. Land sales can be difficult to forecast, but we plan to remain opportunistic with regard to selling additional land assets in the future. As outlined on Page 7 of our webcast slides, the company recorded an adjusted gross margin for the third quarter of 21.6%. This represents an increase of 320 basis points over the third quarter of 2011, and a sequential gain of 130 basis points from the second quarter of this year. Similar to prior quarters, gross margin benefited from company-specific and industry-wide factors, including the improved demand and pricing environment, further expansion of our move-up buyer business, our strategic pricing initiatives and our ongoing efforts to lower house construction cost. In the third quarter, we continued to remain disciplined in our overhead spend and benefited from the leverage of our increased revenue base. As a result, SG&A fell 80 basis points to 10.2% of revenues in the quarter. In total, our SG&A for the quarter was $125 million, which represents a $4 million increase over the third quarter of 2011. The increase relates primarily to higher incentive compensation resulting from the company's improved operating and financial results. Turning to Financial Services. We experienced another outstanding quarter, as we continue to benefit from our strong home sales activities and the favorable interest rate environment. For the quarter, Financial Services produced $27 million of pretax income, which compares to $9 million in the third quarter of 2011. Our current year results reflect a 19% increase in loan origination volume and continued higher gains on mortgage sales. In total, third quarter originations amount to 3,073 loans. Our increased originations reflect the increased volume from our homebuilding operation, as well as an increase in our capture rate to 83%, up from 78% in 2011. As you can see on Slide 10 of our webcast presentation, gross repurchase requests in the most recent quarter showed an increase in activity to the range of 150 to 200, up from the 50 to 150 request per month we've experienced in prior quarters. Based on our review to date, the composition of -- overall profile of the underlying repurchase request has not changed materially. As we have indicated previously, we evaluate the reserves we have recorded related to repurchase requests every quarter. We have not adjusted our reserves in the current quarter, as our current estimate of liability is consistent with our reserves. As we have also indicated, our liability estimates are based primarily on the number of requests we receive, including the length of time we believe such request will continue; our ability to refute or cure those requests; and the significance of the loss we will incur on each request. We will continue to evaluate the impact of these elevated levels, including their impact on our assessment of the length of time requests may continue on our reserve estimates. We've previously indicated that, assuming all factors impacting our reserve estimates remain unchanged, an extension of repurchase request beyond 2013 would result in additional reserves of approximately $25 million for each incremental year of activity we assume beyond 2013. If the factors we consider on our reserve estimates change, the impact of each additional annual period may also change. For perspective, if the level of requests we have received in recent quarters was assumed to continue, and again, all other factors being held constant, the additional reserve required for each incremental year of activity would increase from the previous estimate of $25 million to approximately $40 million to $45 million per year. We continue to focus on this issue and are seeking to resolve our outstanding exposures as efficiently and economically as possible. Closing out my income statement comments, our consolidated net income was $117 million or $0.30 per share. Net income for the quarter included $11 million of tax benefits associated with the favorable resolution of certain federal and state income tax matters. Turning to our balance sheet. We ended the quarter with $1.6 billion of cash. This represents an increase of $243 million from the second quarter of this year, despite an outflow of $96 million in August to fund the maturity of certain of our notes. Our approved cash position results from a number of factors, including the more efficient use of capital by our homebuilding operations for land acquisition and development; the reduction in the level of our spec house inventory; our non-core land asset strategy; and the return of $88 million from our mortgage operation, following the establishment of a new third-party line of credit to support its operation. The combination of our more disciplined investment practices, improved operating performance and resulting positive cash flows has helped to lower PulteGroup's Q3 net debt to cash -- net debt to total capital to 39%. This compares to the net debt to cap of 50% at the end of 2011. As you have likely seen, the company's announced a tender for up to $1 billion face amount of certain outstanding senior notes. The tender offer, details of which are available in last night's release, reflects our strong liquidity profile and is consistent with our previous comments, highlighting our desire to reduce our leverage. It's important to note that us undertaking the tender is not restricting our ability to invest in the business. In fact, we increased our planned land investment during the quarter by $90 million to a full year total of $1 billion. This includes new lands, as well as the acceleration of certain land developments due to the strong sales environment. Our liquidity remains strong, and we'll continue to evaluate the uses of such liquidity with an eye towards improving our financial returns. I also want to take a moment to address questions we get about the accounting for our deferred tax assets, especially in light of the progress we continue to make in delivering sustained profitability. As of September 30, 2012, we had a net deferred tax asset of $2.5 billion, which was fully reserved. Assuming the company remains profitable and the current business trends continue, including continuing improvements in the homebuilding industry, we believe that there may be sufficient evidence to support reducing a large portion of our valuation allowance during 2013. With respect to potential Section 382 limitation related to the Centex transaction, we do not believe such limitations will significantly limit our ability to use future deductions. It's important to note that there's still a lot of work to be done between now and any potential change with regard to the deferred tax assets, and we'll provide updates to this as we progress. Before turning the call back to Richard, let me review a few final data points. We ended the quarter with 707 active communities, down 7% from last year and consistent with our guidance range for the year. At quarter end, we had a total of 7,686 homes in backlog valued at $2.2 billion, the highest dollar value since the second quarter of 2008. And we ended the quarter with 6,800 homes under construction, of which 78% were sold and only 22% were spec. Now let me turn the call back to Richard.

Thanks, Bob. Before opening the call to questions, I'll provide some additional comments on the market conditions we experienced across different geographies during the third quarter. Broadly speaking, it's no surprise when I tell you that demand conditions remain positive. Generally, demand from New England down through Florida was strong, with notable levels of strength in the Northeast, Georgia and the Carolinas and both North and South Florida. Demand here in the Midwest continue to pose significant increases over the prior year, and in certain markets, is even showing meaningful gains from the second quarter. We have previously highlighted the strength in Michigan, but I would tell you that demand across all of our Midwest markets improved in the quarter. The second quarter pickup in demand that we noted in our Texas operations continued into the third quarter, as we realized solid year-over-year increases in all 4 major markets in Texas. Demand out West was strong throughout the quarter, with high order rates ranging from the Pacific Northwest, down through Northern and Southern California and across into Nevada. I would add that demand in Arizona remains exceptional. As we discussed last quarter, however, we have taken direct action to meaningfully slow our sales pace to avoid getting too far out of production in the Arizona -- ahead of production in the Arizona market. With net new orders up 27% in units and 43% in dollars, clearly, we are capitalizing on the improved demand conditions and finding opportunities to raise prices in a growing percentage of our markets. There were a number of very positive points in this morning's release, so just to summarize, over $100 million in after-tax earnings for the quarter, significant year-over-year and sequential expansion in gross and operating margins and strong cash flows, enabling us to lower our net debt to cap to below 40% and support a tender for as much as $1 billion of outstanding debt. Let me thank our entire organization for their sustained commitment to the success of PulteGroup. Your hard work and implementation of key initiatives has been critical to the dramatic operating and financial gains we continue to deliver. Now let me turn the call back to Jim Zeumer. Jim?

Thank you, Richard. At this time, we'll open the call for questions so that we can speak with as many participants as possible during the remaining time of this call. We ask that you be concise in your comments and limit yourselves to one question and one follow-up. With that, operator, if you'll explain the process, we'll get started.

[Operator Instructions] And the first question comes from the line of David Goldberg from UBS.

I wanted to start and talk about the capital structure and, Bob, your comments about the tender not affecting the growth rate or the ability to grow. I'm kind of wondering if you can give us an idea if that's kind of a short-term, near-term, year, 12- to 18-month comment, or kind of a longer-term question. And I totally understand buying back the debt. You have excess cash in the balance sheet, makes a lot of sense. But as you look forward and as you kind of envision where you think the recoveries' going to go, does capital become more of a constraining issue? Or you can -- or can you support the growth that you see effectively through the cash that you're going to generate in the business?

Sure. We -- obviously, we put the tender out. We're excited to see where that goes. We have $1.6 billion on the balance sheet today. Obviously, the fourth quarter is always going to be one of our best cash flow generating periods. We are fortunate, I guess, in one regard that we won't be a taxpayer so our earnings become purely cash accretive. So as we looked at our liquidity profile, although the leverage that we're taking back is fairly expensive, there is yield there. So we are comfortable with the decision to buy that back. We're giving a lot of the economics back to the holders, but still positive yield for us. In terms of your longer-term question, I think, as we look at the market, we feel pretty good and have said consistently that our land position will give us the opportunity to grow with the market. And as we look at capital allocation for future growth, obviously, we committed another almost $100 million to land acquisition and development during the fourth quarter. So I think we feel like we have the ability to do both with the given cash flow and cash position that we have today.

Got it. Great. And then just a follow-up question. Richard, you talked about the ability to successfully navigate the market, given the labor constraints that you're seeing. And I wonder if you can give some color on how you're seeing the subcontract or trades adjust to the improvement in demand that we've seen. We've gotten some color in our channel checks that some of the subs are concerned about bringing on additional labor just because they're not sure the pace of improvement that we've seen so far and this upturn is going to continue. Are you seeing that trend? Or are you seeing the subs kind of being willing to try to grow with you guys, and even though there are shortages, they try to adjust to what's happened in the market?

Yes, David, it's a great question. I would say that earlier in the year, I was hearing more about subs not necessarily wanting to add personnel because of the concerns as to how sustained the recovery was. I'm hearing, as the year progresses, that more and more people are coming back to this space, as you might imagine, overall. I would also point out that I believe we have -- we, being the big builders, have an advantage, given our land supply. Obviously, our subcontractors want to keep their folks employed. And based on what they see out in front of them, while we're clearly facing some price pressure, I believe we're going to be very successful at being able to get our homes built and that's what our teams continue to report. So as I outlined in the prepared remarks, we've seen this movie before. We've operated successfully within it. And it's not a long-term concern, it's just something to be aware of.

The next question we have comes from the line of Ivy Zelman from Zelman & Associates. Ivy Lynne Zelman - Zelman & Associates, Research Division: Richard, you've spoken about the margin improvement. The 21.6% gross margin was pretty impressive. And recognizing this, you've made some significant changes in the cost structure of your company. Can you talk -- 2-part question. First part, how much of that is permanent versus how much of it do you think is just the benefit of the improving environment, with respect to less incentives, and certainly, some of the benefits from market absorptions? But can you talk maybe about permanent versus what would be industry growth rate normally? And then also, 21.6%, do you feel that with incentives decreasing, pricing improving, that you can go well beyond that and you're feeling pretty comfortable with the pretty sizable upside with pricing assuming staying very positive?

Thanks, Ivy. With regard to how permanent we feel kind of the environment is, I would suggest that a number of the things that we are doing internally, we believe, can be long-held gains for us. With regard to some of the structural changes we made, I mentioned on the prepared remarks our common plan management and focus on zones. We believe that's a structural change that's going to benefit us going forward. I also would point out that I mentioned that only 15% of the homes that we closed during Q3 have benefited from value engineering and should costing, and we fully expect that number to go up in the coming years. Having said that, certainly, some of the margin improvement that we've seen was from pricing. But as I indicated, we raised price in the quarter and upwards of 70% of our communities, and that's up fairly dramatically from where it was just a quarter or 2 ago. So we feel pretty good about that. I can't promise that forever and ever we can enjoy this kind of margin performance, given not knowing where the business is going to be going forward. I would also say that there is pressure on commodities. There's no question about that. And so we're not realizing every dollar or price increases to the bottom line. But we continue to feel confident in our ability to get more in pricing than we're getting in cost pressure. Moving to the question about where we go from here, I would say, as we said before, margins quarter-to-quarter are going to be choppy. And clearly, there won't be a straight line, continued sequential improvement every single quarter. But as we look into our backlog, we do see opportunity to move margins higher from here. So we feel good about that and expect that candidly in 2013. Ivy Lynne Zelman - Zelman & Associates, Research Division: Great. My second question is related to your buyer, the profile. Your -- certainly, across all price points and spectrums, can you talk a little bit about the traffic and people that are coming in the door and we're seeing such improved environment? What are people telling you? And how is the quality of the buyer in terms of credit? And the stringency in mortgage is still pretty much at the high levels, but it seems as if it's not an impediment. So maybe kind of a busy question, but if you can address those, I'd appreciate it.

Yes, thank you. Listen, with regard to the last part first. With regard to mortgage availability, it still continues to be tight. It's been tight for the better part of a couple of years. We're not seeing a big change there. So we're pleased with our ability to still get buyers, not only to the sales table that closed today. And Mike can speak maybe later to our FICO scores, if you'd like that, but they continue to stay strong. With regard to the buyer profile, the move-up buyer continues to be very strong for us, the Pulte buyer. I would point out, so does Centex. On a same-store sales basis, we feel good about it. The notable shift this quarter that we're beginning to see, and Bob alluded to this in his remarks, is the Del Webb buyer. It appears that the Del Webb buyer is slowly, but surely, coming back into the business. We kind of predicted that they would lag the other categories in terms of coming back. But as existing home stock falls, as that buyer gets more and more comfortable that kind of housing is here to stay in terms of more of a sustained recovery, we're seeing some additional action. So we're going to watch through the traditionally stronger selling season for us in our Southern markets for Del Webb in the coming couple of quarters to see if that's going to continue. But that's probably the one shift that I would mention vis-à-vis the rest of the year in category.

The next question we have comes from the line of Michael Rehaut. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: You've made great progress in terms of getting your order growth back on track, despite the community count growth you're streamlining. I was wondering, given the better-than-expected or increased amount of land spend, and obviously, you guys continue to see opportunities in the market, combined with already a very good land bank, community count growth plans, is that something that would shift to a positive in '13? And how do you see that coming about? And perhaps, even by segment, as you highlighted the Centex, the community count down above average.

Yes, Mike, this is Richard. I can help a little bit. We're not going to comment on community count. As we go forward, we'll have maybe more to say about that on the next quarterly call regarding 2013. I will tell you that the land evaluation process, in terms of incremental spend, is an evergreen process for us. We're very, very focused on staying attuned to what's happening in the market. And I think we demonstrated a couple times here in 2012 that we're going to be flexible and appropriate with regard to the spend where we need it. The fact is, we have a lot of leverage available from existing assets, particularly in Del Webb, in many of our markets. Other markets, we need to invest, and that's exactly what we're doing. So we feel very comfortable with the progress we're making. Our focus is clearly on ROIC, which we believe directly correlates to shareholder returns, and that's where it's going to stay. Having said that, we're continuing to monitor our land position and are investing appropriately. But more to say about community count on our future call. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Okay. I guess, the second question, on the Financial Services side, you had a nice improvement in income versus 2Q and certainly, you had some better revenues to help with that. But were there any other drivers in terms of the market improvement and profitability? And I guess, secondly, if I could just more broadly on the financial and mortgage area, appreciate very much the comments and scenario analysis on the put-backs. I know it might be sensitive or difficult to talk about, but is there any additional color you can give in terms of where you might be in terms of talks with the other side or the different counter-parties? We've seen another -- one of your peers be able to settle some of those -- some of that activity in a more conclusive fashion.

To the first question, the profitability is primarily, as we talked about, volume from the builder. So our increased volume helps. And it is the interest rate environment. We are experiencing very healthy gains on sale, and that's really the driver. To your second question, we have expressed the desire to try and resolve these. We are obviously in constant dialogue with investors. We don't have anything more to say about any progress on that.

The next question we have comes from the line of Ken Zener from KeyBanc Capital Markets.

Richard, so you're not going to talk about community count. I understand that, and the sooner the better. But I think you guys are in a very unique position, as you've already highlighted, to actually grow and delever. And that's because you're over capitalized on land that you already have, which there's only a few builders in that position. So thinking about that, can you talk about the factors that will drive your thinking to bring out more communities, as it relates to higher absorptions that you're seeing? Is there kind of a litmus test there, realizing all communities are different? And second, your desire to utilize your existing land bank that is available to you.

Yes. Ken, that's a great question. And let me be perfectly clear. Our decisions are motivated by what generates the highest ROIC for us. And as you might appreciate, with 707 active communities, we're monitoring it community by community. As an example, we have many, many Del Webb communities that could reasonably expect meaningful increases in same-store sales growth, with only putting additional development dollars into those and not reinvesting in anything beyond that. And that would be a very, very nice scenario. For us, that would be very beneficial. So those communities, we're not looking to add community count, and that's why we think the community count metric is a little bit overplayed. For us, it's more about what happens to the total revenue, total leverage, obviously, earnings and therefore, the corresponding impact on return, given the size of our balance sheet. So as we speak, we continue to monitor every single community. And where we think we have an opportunity to invest appropriately in return-friendly transactions, we are doing that. So I think, if you look at what's happened to us this year, our order growth rates being very healthy despite a community count decline, in fact, what we have predicted is continuing to come true, which is that same-store sales growth is going to lead the way initially. And we find ourselves candidly in a very flexible position. We have the ability. We're generating so much cash to pay down our debt and continue to reinvest in the business. So I guess, without getting into too much granular detail, you and everybody else should feel very comfortable that we're paying attention to every one of those levers. And our goal is to drive a better return in coming years, and we are, this year. And this year, we think we've demonstrated a better return than we've had previously. So we've been caught in the past before with focusing too much on growth candidly. We have a lot of discipline within the company right now around expanding all the other levers that drive return, most notably margin and SG&A. So we continue to be pleased with our progress there. And we're not going to let an investment opportunity pass us by that we feel like we should take. And we're looking at it each and every day.

Right. And I guess, if I could just take it to the next level there. In '06 -- excuse me, '05, you had roughly 6 absorptions per month. And I think, common how much Del Webb would play into that, given the large community base where you can drive a lot of volume to it. And this is -- the main question now is, have you roughly $700 million mothballed in active land inventory? Could you help us frame out how many lots that is, A? B, how many of your total loan lots are finished? And this gets to the fact you can delever during your growth, which is actually a very attractive risk-adjusted framework for you guys versus other people and it starts with a double, with all that mothballed stuff really being brought back online. But main piece, inactive, how many lots that is and finished lots.

Yes, Ken, there's a lot in that so I'll take the first part and then turn it over to Bob and maybe Mike for a little bit of additional commentary. First of all, with regard to Del Webb, I think we've commented before publicly that, at our peak in '05, we had Del Webb communities generating anywhere from 750 to 1,000 units per single community. While nobody's predicting that, I will tell you we don't have any -- doing more than like 250 today. So that business has the ability to ramp up and ramp up nicely. And candidly, we've talked about the ability to reduce our overall land bank and reinvest in other land. That would be a great scenario for us, if Del Webb continues on a positive trend than we've seen. With regard to mothballed assets, I believe, recently, that we've been able to bring on about 15 mothballed communities. Beyond that, Bob, if you have any more color?

Yes, we haven't, Ken, given a mothballed asset lot count or value, candidly. So I think what we do is actually look at it. And if mothballed means different things to different builders, certainly, we've got a longer land base since Richard talked it in the Webb communities. But we are focused on wherever it's appropriate taking assets, either that are non-core and selling them, if it's appropriate, or opening up communities.

Just to finish it, maybe give some data points on finished lots in total, not for mothballed, but just our total portfolio. We do have 30,035 finished lots we own. We control 35,754 in total, of which 7,900 are related to house.

The next question we have comes from the line of Stephen Kim from Barclays.

Just a housekeeping issue. I just assume that you all have somewhere in the order of about 1,200 model homes, and I just was hoping you could update us on that number. But more broadly, and more strategically, I was curious about your gross margin commentary. Last quarter, I believe, you made the comment that you thought that normalized gross margins in the business could get 20%, 25% -- 20% to 22% on your basis when you calculate it. But then it would "take a couple of years" I think, is what you said. Was curious as to -- since you just put up a 21.6%, how you're thinking maybe evolving there.

Yes, Steve. This is Richard. Listen, things have panned out pretty nicely for us, perhaps even better than we anticipated. We've got a nice benefit from mix in the quarter. We clearly got some pricing in the quarter. We clearly got some house cost. But just to be clear, our 20% to 22% was a non-adjusted number. So there's still several hundred basis points to go there when you take out the effective interest.

Yes, from a model perspective, we're at 1,120 models at the end of the quarter.

Okay, great. And then, let's switch to the put-back. I mean, that was really great, the disclosure you just gave. But one question that I had relates to sort of from our perspective, trying to figure out how long it might be that these elevated level of put-backs may occur. And in that regard, can you tell us what the current vintages are of the put-backs? Is there any way to characterize it, particularly on a relative basis to maybe what you're experiencing a year ago?

Yes. We haven't seen a dramatic change in any of the elements that we look at, and one of them is the year of origination. Today, we had talked about that it was primarily 6 and 7. That is still true. The severity of loss hasn't changed much. So again, what we're seeing is a continuation of the same. Obviously, we continue to research them, but we haven't seen a change.

The next question we have comes from the line of Stephen East from ISI Group.

Bob, if I could just follow on just a couple more questions on the put-back. The volume went up this quarter. One, is there -- what do you think the reason is for that? What's going on there? And then two, when you say in future years, your reserve through '13, does that mean -- at what level do put-backs need to drop to that you wouldn't have to reserve for '14 or '15? And then I just wanted to make sure I was clear in the last -- in your prepared remarks. You said if history holds another $25 million a year, if it goes beyond '13, but if the more recent quarter holds, that goes up to $40 million to $45 million. Is that accurate?

Yes, what we've -- sorry, the last one was -- the $40 million to $45 million is based on a recent activity, not necessarily the fourth -- the third quarter. We tend to look at these things over time. 2 months or 3 months, we don't think necessarily makes a trend, so we have to see what that really evolves into. The question on why volume is up, it is, at least as best we can tell, just normal process from investors. And then for '13, extending out beyond that, again, put-backs have always been part of the business. They were around but just much less pronounced than they are today. And so we would have to see a return to that for there not to be any impact in '14 and '15. Again, we're evaluating that as we go.

Okay. And then if you look at your debt tender, your cash level, ignoring what you had generate in the fourth quarter, and I would be interested in how much you think you can generate there. But you dropped down to $500 million to $600 million or so if all $1 billion is tendered. I guess, what level are you comfortable taking that down to? Do you envision putting revolver in place to compensate for some of the cash going out the door? Or would you all look at convert and deal or future debt deal? And then also, in the past, you all had said it was very expensive to take this debt out. I guess, what's changed in your thought process there?

Well, certainly, to the extent that we were able to take in $1 billion, we expect to be cash flow positive in the fourth quarter. We haven't given any guidance on that. But we did generate $240 million plus of cash in the third quarter. In terms of credit facility, we've looked at that and our view is we want to be able to put the best credit package in front of people. So the more positive earnings performance we can do, the better we're going to do in terms of the facility we can put in place. If we were in a position 3 months from today or soon as the tender were over, where we felt we needed to go raise capital, we think we could do it in the capital markets pretty inexpensively and efficiently, whether that would be senior subordinated notes or convertible. We'd evaluate based on economics at the time. So we think -- then Richard used the word earlier, it's about flexibility. We have the opportunity to make decisions and from relatively -- we have choices. The other question you asked is why are we doing this now? It is expensive. We've said that from the start. Unfortunately, it is what the market is telling us the bonds are worth. And as we look at it, we get a positive yield versus the cash sitting on the books. So elected to do this today, again, trying to drive down the leverage we've talked about wanting to do that.

The next question we have comes from Dan Oppenheim from Credit Suisse. Daniel Oppenheim - Crédit Suisse AG, Research Division: I was wondering if you can talk a little bit more about Del Webb. You talked about pricing overall of 7% communities during the quarter. I guess -- wondering if we -- if you were to look at Del Webb, the order trend's improving now. Are you seeing any pricing power at Del Webb? Or are we still several quarters from that? Just a little clarity there.

Yes, Dan. I think Del Webb would be a segment that we'd want to drive a lot more volume before we got real aggressive on the price side. I don't have detailed specifics by community for you. I'm certain that each of our Del Webb communities offers 3 or 4 different lines of product. And probably, in some communities, we've got lot positions and product that's in high demand where we are getting some price. But generally speaking, we're going to look to drive much better returns by a lot more volume in Webb before we drive prices up there aggressively because that would be the best ROIC decision. Daniel Oppenheim - Crédit Suisse AG, Research Division: Great. And next, in terms of the land development, you talked about increasing that based on stronger sales of this. How much of that is additional phases of existing communities versus bringing on new communities here?

Sorry, of the current year spend? Daniel Oppenheim - Crédit Suisse AG, Research Division: Yes, I'm guess just wondering, as you increase that, just how much are you looking forward in really trying to bring on more community, sort of developing raw land that you have in communities that aren't currently operating versus just other phases of existing communities here.

Well, again, we're going to commit about $1 billion in 2012. Roughly 1/3 of it is going to be buying land. The rest is land and land development.

And Dan, the incremental $90 million is a mix of both that we just talked about.

The next question we have comes from the line of Nishu Sood from Deutsche Bank.

This is Rob Hansen on for Nishu. Of the land and land development spend that you're going to do this year, how much of that is already working for you? Meaning, how many of those -- how much of that money is -- have communities tied to it that are already open? And how much are going to be opened for next year?

Well, I don't have the granularity on that, Rob. It's fair to say it's a combination. I would suggest that the majority of it is likely already working for us as newer phases and new lots from existing communities come on. But there's not an insignificant amount of new projects. Exactly when those come on, it's a continual revolving door as we close some and open others. So sorry, I -- we don't have that level of detail.

Okay. And then I just wanted to see if you could talk a little about -- a little bit more about your common plan management zones and how large are these zones and what percent of markets was this -- that have this in 2012 and how much -- what are you going to ramp that up to in 2013.

Yes. So basically, the idea here is to drive our throughput for floor plan up much higher than it is today. And what that means is the number of closings that we can get from an individual plan that has been consumer validated and design with the consumer in mind upfront and value engineered it before it ever goes into production and contrast that with an existing set of floor plans where we may go in and attempt to take cost out. It's a lot easier to do it on the upfront. So we've been piloting a process starting in Texas, and we've expanded it to the Southeast where several cities, all of the major cities in Texas and now all of the major cities in the Southeast, are operating under the mindset based on consumer research that buyers in those 2 geographies will accept and be happy with product that can be shared among those geographies. So instead of value engineering a floor plan in Dallas, for an example, and getting 30 or 50 closings to benefit from it, maybe we can get 300 closings benefit from it because all the cities in Texas are now using it. So the idea is that, over 2013, we will expand that concept to the rest of the country and implement additional geographic product zones. Now I also gave a statistic in Q2 that about 10% of our closings that actually came through in Q2, and that went up to 15% in Q3, benefited from value engineering and should costing in the actual closing volume. So even though we have a zone implemented already in Texas and one in the Southeast, it's going to take a while to get all of the floor plans through that commonly managed product. So we see this as a 2- or 3-year effort before we can drive that 10% or 15% number much higher, but our candid expectations are to go much, much higher with that. And that's one of the sources of ongoing margin expansion that we believe we have.

We have the next question from the line of Megan McGrath from MKM Partners.

I wanted to follow up a little bit on your commentary about restricting yourself based on a couple of geographies. Is labor the only real bottleneck you're seeing? Or are you experiencing any other bottlenecks in the system like permitting or leaner land development or anything like that?

I would suggest labor is only a small part of it. A lot of it has to do with how far do you want to carry your backlog. I mean, we saw sales explode in Arizona earlier this year and made a very conscious decision to slow it down because we didn't want a backlog. Keep in mind, like in Q2 of this year, extending out a year or more. So Megan, it's based on, in some cases, things like labor constraints or permit delays of the given municipality. But the far more broad reason is how far do you want to let the sales run out and how far do you actually want your backlog out. We generally, as an example, feel like that we can protect our cost for roughly 6 months. And so we may let a backlog in a given community go out to, say, 9 months or something like that. But generally speaking, 2 to 3 quarters worth of backlog in a given community is, in our opinion at PulteGroup, about where you want to have it to maintain relatively consistent ability to start, et cetera. Now I would suggest if the market ramps up further from here, both permitting and entitlement issues and labor issues, to some degree, may limit your ability to get out and deliver those units in a quick fashion. But I don't want to overplay the labor issue. It's more a conscious decision on our part on -- frankly, we want to hold back some dry powder for the potentially improved pricing environment and our ability to protect our cost out in the future. And just wanted to comment on that. We are seeing that in more than just Arizona. We've got communities in Florida, D.C., Northern California and other places where we're purposely restricting sales.

Okay. I guess that was -- you partially answered my question, but I think that's sort of what I was getting at. If there were no restrictions in terms of labor or supplies, is this sort of the maximum amount of growth that you're comfortable with at this point of the cycle, given where pricing is? Because expectations are fairly lofty for 2013, I think, on a national basis, but I don't know if builders are really comfortable pushing units beyond a certain point. And so it sounds like even if there weren't labor constraints or other physical constraints that you are -- you wouldn't -- you are sort of limiting construction a little bit to maximize price in the long term. Is that fair?

Megan, it's fair to some degree, but let me be clear about this. You said that if we didn't have labor constraints or other constraints, in some cases, those constraints are lot availability, as an example, so you've got real strong performance in a given community. You thought you were going to sell 50 in a given year and all of a sudden you're at 100, you can only ramp up a lot production so quickly. So we are solving for the highest possible ROIC. And in many cases, we're finding, at least in the short term, that's through price versus additional pace. So I don't want to give you the impression we'd rather not drive volume, but we do have to live within the environment of a combination of factors of lot availability, labor availability, our ability to get permits. In some municipalities, they're limiting us on the number of permits we can pull. So it's not so much what the builder wants to do, it's what we believe is the smartest business decision, given the environment we're in.

We have no further questions at the time. So now I'd like to hand the call back over to Jim for closing remark.

Thank you, operator. I want to thank everybody for their time this morning. We will certainly be available as the day continues to answer any additional questions, and we'll look forward to speaking with you on the next call.

Thank you, Jim. Thank you for your participation today, ladies and gentlemen. That concludes the presentation. You may now disconnect. Have a good day.